Canada: The Looming Uncertainty Of Softwood Lumber

Learning from history

The 8,891 km boundary between Canada and the United States is
often referred to as "the world's longest undefended
border," but that's only in a military sense. Despite free
trade agreements, disputes over softwood lumber have been ongoing
since 1982, stemming, largely, from US sentiment that the Canadian
softwood lumber industry is unfairly subsidized.

With multiple investigations, appeals and decisions over more
than 30 years, it's not hard to see a pattern:

1. The US lumber industry lobbies for tariffs to increase the
price of Canadian imports.

2. Tariffs are imposed by the US government.

3. Canada appeals to a North American Free Trade Agreement
(NAFTA panel, or the World Trade Organization (WTO)).

4. A decision is rendered.

5. The United States challenges the decision, if the decision is
in favour of Canada.

6. An agreement is reached.

Negotiations usually take years. When the 1996 Softwood Lumber
Agreement expired on April 2, 2001, the final legal text of the
next agreement was not signed until July 1, 2006, and resulted in
the return of $4 billion of the $5 billion in tariffs charged to
Canadian companies between 2002 and 2006.1

Learning from the present

History tells us to expect a lengthy negotiation period, but
what about the present? Let's explore the current circumstances
that could have an impact on the duration, or difficulty, of the
agreement process:

A growing tide of
protectionism. Between Britain voting to leave the
European Union, and both US Presidential candidates opposing the
Trans-Pacific Partnership Free Trade Agreement, it's clear that
import restrictions are increasing in popularity across the
globe—in both emerging and established economies.

The US election.
This election, in particular, is creating increased uncertainty
overall, and will likely result in a reduced focus in reaching an
agreement, at least in the short term.

The underlying cause of the
lumber dispute remains. Canadian lumber is cheaper to
harvest and export than American lumber.

Preparing for the future

Both countries are bracing to head back to court in this
longstanding dispute. There is speculation that the US lumber
industry will file a case for tariffs by the end of October, after
which the US Department of Commerce would have up to 20 days to
begin an investigation, and a further 65 to 130 days to issue a
preliminary determination.2 This could mean that tariffs
could start to be applied by early 2017.

So how can you prepare?

Plan, plan, plan

When you consider the potential effects on your business, what
impact will a protracted dispute have on your revenue and sales
projections? Will you have enough to cover your fixed and variable
costs, both short term and long term? If not, how can you reduce
your expenses, or what financing options could be available to
inject cash into your operations without creating a crippling debt
burden?

It's important to plan ahead, thinking about not just the
most likely, but also the worst case, scenarios to ensure your
business can survive and thrive in challenging times.

Speak up

The US softwood lumber industry has a strong lobbying voice in
the form of the US Lumber Coalition—an alliance of large and
small softwood lumber producers from across America. Their singular
purpose is to address what they refer to as the "gross
under-pricing of timber" and they will lead the industry in
the development of new petitions against Canadian softwood imports,
should an agreement not be reached quickly.

Given the pressure expected from the US lumber industry,
it's important for Canadian companies to stand up and be heard
as well. Lobbying and legal expenses should be factored into your
plans and budgets, whether you speak for just your company, or
collaboratively with the rest of the industry.

Retailers, distributors, restaurants, domestic producers and others have been anxiously awaiting the Government of Canada's announcement on the process for Canada-European Union Comprehensive Economic and Trade Agreement cheese quota.

Sometimes, disputes that have arisen prior to the implementation of a free trade agreement, which are left unresolved at the time of implementation, turn into full disputes between the parties. What could those disputes be?

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